London School of Economics—Reinventing Bretton Woods Committee Conference: Innovations in global financial governance and the role of emerging economies
Session: Capital flow management
Buenos Aires, 20 March 2018
Ladies and Gentlemen,
I would like to thank the conference organisers and Banco Hipotecario Argentina very much for inviting me. I will try to take a bit of a different approach on capital flow management, the title of this session, to highlight the role of international currencies and show important parallels between the Maria Theresa thaler and bitcoin. I hope to leave you with some confidence that cryptocurrencies have a natural role to play in the international economy, that there is a case to change the geography of money, that there is a continuum of types of money and that adoption of cryptocurrencies should be highest where monetary experiences have been bleakest.
International currencies play important roles for capital flow management. There are more than US$11 trillion, 14 percent of world GDP, in foreign exchange reserves held by central banks. 64 percent of reserves are denominated in U.S. dollars. Reserves are held to counter undue capital flows. They are the outcome of fundamental inefficiencies in the international monetary system.
To start, please consider that national currencies are fundamentally ill suited to serve as international currencies. The dollar is the currency of the U.S. and the U.S. Federal Reserve pursues national policy objectives and is accountable only to the U.S. Congress. Robert Roosa famously wrote in 1965 that “there will be recurrent collisions between the role of […] money as a medium of exchange and […] as standard of value. As a medium of exchange, money must be expansible to serve the needs of growing trade […]. As a standard of value […] money must be limited in quantity in order to preserve its purchasing power […].1
There is nothing to suggest that the current international monetary arrangement built around national currencies represents an optimal state of affairs or let alone a natural order. Moreover, the notion that every country should have its own currency is odd, the Euro Area and other monetary unions are notable exceptions.2 With the euro, the European Union demonstrated that national currencies do not need to be forever. Needless to say that territorial currencies are a relatively recent phenomenon and emerged only in the middle of the nineteenth century in Europe. I’m not advocating a world currency but I do believe that optimal currency areas are not determined by national borders.
The Maria-Theresa thaler was one of the main silver coins in Austria from 1741. It was a truly international currency from the middle of the eighteenth through the twentieth century long after it lost its legal tender status in 1852 and was withdrawn from circulation in Austria in 1892. The coin served to fuel international trade in Europe, the Middle East and Africa. Mints in Austria but also Birmingham, Bombay, Brussels, London, Paris, Rome and Utrecht issued the Maria Theresa thaler and it circulated widely from inner Africa in Sudan and Ethiopia, the northwest cost of Africa to Madagascar and from Turkey to Oman and as far as China, served as legal tender in Saudi Arabia, Ethiopia, Nigeria, Yemen and Oman.3 The coin was popular amid its high familiarity, stable fineness, its beautiful and ornate design that made counterfeiting difficult. Its history is well known. The only other coin that was arguably more important for international trade was the Mexican silver dollar or Spanish pieces of eight.4
Bitcoin emerged in 2009. It represents a private, unreserved and convertible medium that is being issued on the basis of a pre-determined issuance algorithm. Its classification as currency remains disputed and adoption and circulation continue to be marginal. However, significant increases in valuation could result in an important monetary impact. Bitcoin aims to substitute existing monetary arrangements by advocating strict peer-to-peer exchanges and eliminate dependence on banks and governments or other centralised trusted parties to conduct financial transactions irrespective of location. The bitcoin network exhibits more than 11,600 nodes in 105 countries where 51 percent of the network’s hashing power is needed to validate any new transaction that is recorded in a decentralised ledger or blockchain. Many other cryptocurrencies with similar or differentiated aims and setup have emerged.
The Maria Theresa thaler and bitcoin are private, deterritorialised currencies with decentralised issuance. The advantages of international currencies rest naturally in internalising the transaction costs and more importantly valuation changes inherent in dealing in different national currencies. International currencies need to adapt only to changes in the international economy. As with the Maria Theresa thaler, network effects are critical for success. The Maria Theresa thaler achieved adoption not by political power, as in the case of colonial currencies or by treaty; the coin became a pure trading currency in particular during the twentieth century with issuance and circulation beyond any sovereign interference.5
Maria-Theresa thaler 1741 (Hungary)*
Bitcoin block 0 genesis*
The adoption of new currencies are likely to be a function of monetary experience. Economic agents in countries with a stable currency or with a currency that is readily accepted in international transactions may be less inclined to adopt a new currency. In the same token, dependence on third currencies and less favourable monetary experiences may lead to greater openness to consider migration to a new medium. Higher transactions costs in some countries also promise greater benefits. The distribution of net gains from adopting cryptocurrencies are likely to be skewed and there is doubtfully a representative viewpoint to favour or reject adoption. While cryptocurrencies have recently been criticised for their undue volatility and other things by leading central bankers, most countries have experienced traumatic exchange rate movements, many high inflation in particular in Latin America and forced conversions through a corralito as in Argentina. To many an alternative to a government monopoly in the production of money may be quite appealing. At the same time, it seems clear that cryptocurrencies today while fit in principle are not fit in practice to assume a broader role.
The geography of money does not seem right. 64 percent of foreign exchange reserves in dollars means a considerable dependence on the dollar. The U.S. has played a hugely disproportional role in monetary reconstruction after World War II and maintains an outsize position through today. Emerging markets’ currencies have assumed to date no meaningful role to conduct international transactions. This despite the fact that emerging markets represent about 45 percent of international trade.6 Will the dollar always be able to satisfy the needs of the international economy? Maybe but maybe not.
To conclude, deterritorialised currencies have a natural role to play in a global economy. The supply and demand of currencies to conduct international transactions should not be constrained by national monetary policy considerations. Currencies can fulfil different functions that must not cover all functions of money. Emerging markets ought to be at the forefront of giving considerations to cryptocurrencies and shape adoption and best practice as they may have the most to gain. The Maria Theresa thaler was popular because it was minted to serve international trade. The new cryptocurrencies seem in principle though not in practice the better currencies to take over that old idea.
* Pictures by Marion Mandeng.
1 Robert Roosa, Monetary reform for the world economy, Harper and Row, 1965, p. 10.
2 See on the notion of territorial currencies, Eric Helleiner, Historicizing territorial currencies: Monetary space and the nation-state in North America, Political Geography, 1999, p. 309-39.
3 See Adrian Tschoegl, Maria Theresa’s thaler: A case of international money, Eastern Economic Journal, 2001, p. 443-62.
4 Spanish pieces of eight were minted in Sevilla, Mexico and Potosi.
5 See Josef Hans, Zwei Jahrhunderte Maria-Theresien-Taler 1751-1951, Selbstverlag, Klagenfurt, 1950.
6 World Trade Organisation, merchandise trade, exports 2016.